Stock corner: Maintain ‘buy’ on HUL with target price of Rs 2,250

With the push-for-premium sustaining, we expect better earnings growth.

Hindustan Unilever’s (HUL) Q2FY20 revenue growth of 6.7% YoY came in line, while EBITDA and PAT spurt of 21.0% and 21.5% YoY, respectively, surpassed our estimates. Despite near trough rural growth (mere 0.5x urban), volume grew 5% YoY on a base of 10%, implying resilient urban growth. By segment, though beauty & personal care posted a soft quarter (up 5.3% YoY), with pricing action we expect this segment to turn around.

The company has partially ploughed back savings in gross margin into ad spends. This, coupled with cost efficiency measures, led to impressive 307bps YoY EBITDA margin expansion (200bps adjusting for Ind AS 116)—highest in HUL’s history (except Q1FY20). Delay in HUL-GSK merger approval was the only negative during the quarter. Maintain ‘BUY’ with TP of `2,250.

Key highlights: Home care segment grew 9.4% YoY led by premiumisation & increase in penetration leading to 151bps EBIT margin expansion. Within beauty & personal care (up 5.3% YoY), growth was led by the premium segment. Foods & refreshments’ revenue rose 8.4% YoY with EBIT margin falling 139bps YoY on account of higher raw material cost.

Monsoon has been good. With more direct transfer to farmers should aid volume growth. Near-term demand outlook remains challenging. Premium and naturals continue to grow faster. Further price reductions to be taken in Dove and Pears Q3FY20 onwards.

We envisage HUL to be key beneficiary of the anticipated rural recovery and herbal push, and expect its decent volume growth to sustain. With the push-for-premium sustaining, we expect better earnings growth. Rolling forward the valuation leads to TP of `2,250 (55x, 12-month forward PE). We maintain ‘Buy/SO’. At CMP, the stock is trading at 49.2x FY21E EPS.